2Payroll Computations, Records, and Payment Chapter10Payroll Computations, Records, and PaymentSection 1: Payroll Laws and TaxesSection ObjectivesChapter 9 discussed several aspects of business accounting, including special journals, the petty cash fund, and bank reconciliations. Chapter 10 continues the study of business accounting by discussing payroll accounting. Section 1 explains the major federal laws relating to employee earnings and withholdings. The first objective of the chapter explains the major federal laws relating to employee earnings and withholding.Explain the major federal laws relating to employee earnings and withholding.
3Characteristics of an Employee Works under the control and direction of the employerUses tools or equipment provided by the employerWorks certain hours that are set by the employerAn employee is a person who is hired by and works under the control and direction of the employer. There are several common characteristics of an employee. In most situations, an “employee” works in the employer’s facility, using the employer’s tools, under the employer’s direct supervision. An independent contractor works unsupervised, usually away from the employer’s facility. This chapter discusses the withholding for an employee, not an independent contractor.
4Explain the major federal laws relating to employee Objective 1Explain the major federallaws relating to employeeearnings and withholdingWhat are the major laws relating to employee earnings and withholding?
5The Fair Labor Standards Act of 1938 Also referred to as the Wage and Hour LawApplies only to firms engaged directly or indirectly in interstate commerceSets a minimum hourly rate of pay and maximum hours of work per week to be performed at the regular rate of payThe most significant law is the Fair Labor Standards Act. This is sometimes referred to as the Wage and Hour Law. The law applies to firms engaged directly or indirectly in interstate commerce. The Fair Labor Standards Act fixes minimum wage and the maximum number of hours or work per week to be performed at the regular rate of pay. Hours worked in excess of 40 must be paid at one and one-half times the regular rate of pay.Employees who work beyond 40 hours a week are entitled to“time and a half” times the regular rate of pay for the extra hours.
6Social Security TaxAs of 2010The amount of social security tax is determined by:rate6.2%earnings up to a calendar year earnings base$ 106,800The rate (6.2 percent) has remained constant in recent years.The earnings base has increased each year.The tax provides for retirement, disability, and death benefits. It also provides survivor benefits for the worker’s minor dependent children and spouse if the worker dies.Social security tax is a tax imposed by the Federal Insurance Contributions Act (FICA) and collected on employee earnings to provide retirement and disability benefits. Social security tax provides benefits for employees and their families, including: retirement benefits or pension benefits for the dependents of a deceased worker and benefits for the worker and the worker’s dependents when a worker is disabled. The Social Security act also provides benefits for a worker’s surviving minor dependent children and spouse if the worker dies.The tax is subject to maximums which often change. As of 2010l the social security rate was still 6.2%; the earnings base was $106,800.
7Medicare Tax The amount of Medicare tax is determined by: rate1.45%earningstotal earningsThe rate (1.45%) has remained constant in recent years.The Medicare tax does not have an earnings base limit.Medicare tax is a tax levied on employees and employers to provide medical care for the employee and the employee’s spouse after each has reached age 65.The current Medicare tax rate is 2.9% % is withheld from the employee’s paycheck and the other 1.45% of the employee’s tax is paid by the employer. So, out of an employees gross wages, Medicare is withheld at the rate of 1.45% and social security is withheld at the rate of 6.2%. The employer pays a matching portion.
8State and Local TaxesMost states, and many local governments, may require employers to withhold income taxes from employees’ earnings to prepay the employees’ state and local income taxes.The rules are generally almost identical to those governing federal income tax withholding.Employers are required to withhold income taxes from the employee’s earnings. Federal income tax is an additional withholding tax which comes out of an employee’s gross wages.Employees subject to federal income tax withholding are also subject to state and/or local income tax withholding in most states. There are a few states which don’t require employees to pay state income taxes (Alaska, Washington, and Texas are examples.)
9Employer’s Payroll Taxes and Insurance Costs Employers withhold social security and Medicare taxes from employees’ earnings.In addition, employers pay social security and Medicare taxes on their employees’ earnings.Employers are also required to pay:Federal unemployment tax (FUTA)State unemployment tax (SUTA)Workers’ compensation insurance (Not a tax)The FUTA and SUTA tax rates are applied to a taxable earnings base.This text assumes that the taxable earnings base is $7000.Employers must pay the following payroll taxes: State Unemployment Tax (SUTA), Federal Unemployment Tax (FUTA), Social Security Tax (1/2 of employee’s), Medicare Tax (1/2 of employee’s). Only employers pay Federal Unemployment tax. Sometimes this tax is referred to as FUTA. The employee does not pay this tax. State unemployment taxes (SUTA) are taxes levied by the state government against employers to benefit unemployed workers. Sometimes this tax is referred to as SUTA. The FUTA and SUTA tax rates are applied to a taxable earnings base. We will assume that $7,000 is the wage base maximum. Employers get a credit for State unemployment taxes paid, applied against their Federal Unemployment tax liability. The “net” federal unemployment tax rate in that case is .8% (.008).
10Worker’s Compensation Insurance QUESTION:What is workers’ compensation insurance?Workers’ compensation insurance is the insurance that protects employees against losses from job-related injuries or illnesses, or compensates their families if death occurs in the course of employment.ANSWER:In states where it is required, employers pay for insurance that will reimburse employees for losses resulting from job-related injuries or will compensate their families in the event of death in the course of their employment.
11Employee Records Required by Law Federal laws require that certain payroll records be maintained. For each employee the employer must keep a record of:Employee’s name, address, social security number, and date of birthHours worked each day and week, and wages paid at the regular and overtime rates (certain exceptions exist for employees who earn salaries)Cumulative wages paid during the yearAmount of income tax, social security tax, and Medicare tax withheld for each pay periodProof that the employee is a United States citizen or has a valid work permitThe employer must keep a record of: Employee’s name, address, social security number, and date of birth, hours worked each day and week, wages paid at the regular and overtime rates, cumulative wages paid during the year, amount of income tax, social security tax, and Medicare tax withheld for each pay period, proof that the employee is a United States citizen or has a valid work permit. Failure to keep proper payroll records can result in hefty penalties for businesses.
12Payroll Computations, Records, and Payment Chapter10Payroll Computations, Records, and PaymentSection 2: Calculating Earningsand TaxesSection ObjectivesCompute gross earnings of employees.Determine employee deductions for social security tax.Determine employee deductions for Medicare tax.Determine employee deductions for income tax.Enter gross earnings, deductions, and net pay in the payroll register.Section 2 of the chapter deals with the actual withholding calculations and recording those calculations in the payroll register. The second objective of the chapter explains how to compute gross earnings of employees.
13Compute Gross Earnings of Employees Objective 2The first step in preparing payroll is to compute the gross wages or salary for each employee. There are several ways to compute earnings.Hourly rate basisSalary basisCommission basisPiece-rate basisObjective two of this chapter is to compute the gross earnings of employees. The first step in preparing payroll is to compute the gross wages or salary for each employee. There are several ways to compute earnings. You should practice computing these wages and salaries for each type of employee.
14Computing Gross PayThe gross pay for hourly employees for the week ended January 6 is determined as follows:Total hours Rate of pay Gross payAlicia Martinez 40 hours X $ = $400.00Jorge Rodriguez 40 hours X $ = $380.00Gross pay is calculated by multiplying the number of hours times the rate of pay (unless there is overtime involved).
15OvertimeGeorge Dunlap earns $9.00 per hour. He worked 45 hours. He is paid 40 hours regular rate of pay and 5 hours at time and a half.Therefore, Dunlap’s gross pay adds up to:Regular earnings: hours X $ $360.00=Overtime earnings: 5 hours X $ $=Gross Pay $427.50If overtime exists because the employee worked over 40 hours, the employee would get paid at the rate of one and one half times the normal hourly rate for the time over 40 hours.
16Withholdings Required by Law Recall that federal law requires employers to make three deductions from employees’ gross pay:FICA (social security) taxMedicare taxFederal income tax withholdingEmployers will withhold social security, medicare and federal income tax from an employees wages.
17Tax-exempt Wages Determine employee deductions for social security tax Objective 3Tax-exempt WagesEarnings in excess of the base amount ($106,800 as of 2010) are not subject to FICA withholding.If an employee works for more than one employer during the year, the FICA tax is deducted and matched by each employer.When the employee files a federal income tax return, any excess FICA tax withheld from the employee’s earnings is refunded by the government or is applied to payment of the employee’s federal income taxes.Objective 3 has us calculating social security deductions. Any wages in excess of $106,800 (as of 2010) are not subject to social security tax.If an employee works for more than one employer, FICA taxes are deducted and matched by each employer. When the employee files a federal income tax return, any excess tax is refunded. (The employer, however would not receive any refund.)To determine the amount of social security tax to withhold, multiply the taxable wages by the social security tax rate and round off to the nearest cent. Remember that anything above the maximum wages is not subject to the tax.
18Medicare Tax Determine employee deduction for Medicare tax Objective 4 To compute the Medicare tax to withhold from the employee’s paycheck, multiply the wages by the Medicare tax rate, 1.45 percent.Alicia Martinez $ X 1.45% = $ 5.80Jorge Rodriguez X = $ 5.51George Dunlap X = $ 6.20Cecilia Wu X = $ 8.12Employee Gross pay Tax rate TaxTotal Medicare tax $25.63Remember that there is no limit on the wages subject to Medicare tax. In this pay period, $25.63 was withheld from all employees wages for Medicare tax.
19Determine employee deductions for income tax Objective 5The amount of federal income tax to withhold froman employee’s earnings depends on the:earnings during the pay periodfrequency of the pay period (weekly, bi-weekly, semi-monthly etc.)marital statusnumber of withholding allowancesA substantial portion of the federal government’s revenue comes from the income tax on individuals. Withholding depends on earnings, frequency of the pay period, marital status, and number of allowances.
20Withholding Allowances In the simplest circumstances, a taxpayer claims a withholding allowance for:the taxpayera spouse who does not also claim an allowanceeach dependent for whom the taxpayer provides more than half the support during the yearAs the number of withholding allowances increases, the amount of federal income tax withheld decreases.An allowance generally refers to the number of exemptions the person is going to claim at the end of the year on their income tax return (Form 1040).
21What is the Employee’s Withholding Allowance Certificate, Form W-4? QUESTION:What is the Employee’s Withholding Allowance Certificate, Form W-4?The Employee’s Withholding Allowance Certificate, Form W-4 is a form used to claim exemptions (withholding allowances).ANSWER:To claim withholding allowances, each employee completes an Employee’s Withholding Allowance Certificate, Form W-4.
22Computing Federal Income Tax Withholding The wage-bracket table method is the most common way to compute the federal income tax withholding.The wage-bracket tables are in the Federal Publication 15, Circular E.The wage-bracket table method is the most common way to compute the federal income tax withholding. Employers choose the proper table based on pay period and employee’s marital status.
23Cecilia Wu is married, claims two withholding allowances, and earned $560 for the week. The tax to withhold is $30; this is where the row and column intersect.For Cecilia Wu, $30 is withheld from her paycheck for federal income tax.Go to the table for married persons paid weekly.Find the line covering wages between $560 and $570.Find the column for two withholding allowances.
24Other Deductions Required by Law Most states and some local governments require employers to withhold state and local income taxes from earnings.In some states employers are also required to withhold unemployment tax or disability taxes.The procedures are similar to those for federal income tax withholding.Apply the tax rate to the earnings, or use withholding tables.Most states and some local governments require employees to withhold state and local income taxes as well.
25Voluntary DeductionsThere are many payroll deductions not required by law but made by agreement between the employee and the employer.Some examples are:Group life insuranceGroup medical insuranceCompany retirement plansBank or credit union savings plans or loan repaymentsUnited States savings bonds purchase plansStocks and other investment purchase plansEmployer loan repaymentsUnion duesCan you think of any other types of deductions which you could voluntarily have withheld from your paycheck?
26Enter gross earnings, deductions, and net pay in the payroll register Objective 6PAYROLL REGISTER WEEK BEGINNING January 1, 2013NAME NO. OF MARITAL CUMULATIVE NO. OF RATEALLOW STATUS EARNINGS HRS.Martinez, Alicia MRodriguez, Jorge SDunlap, George SWu, Cecil MBooker, Cynthia S(A) (B) (C) (D) (E)Enter the employee’s name (Column A), number of withholding allowances and marital status (Column B), and rate of pay (Column E).Objective 6 is to enter gross earnings, deductions, and net pay in the payroll register. A payroll register is a record of payroll information for each employee for the pay period. Alicia Martinez has one withholding allowance and she is married. She worked 40 hours this week and is paid $10 per hour.
27Completing the Payroll Register PAYROLL REGISTER WEEK BEGINNING January 1, 2013NAME NO. OF MARITAL CUMULATIVE NO. OF RATEALLOW STATUS EARNINGS HRS.Martinez, Alicia MRodriguez, Jorge SDunlap, George SWu, Cecil MBooker, Cynthia S(A) (B) (C) (D) (E)Since this is the first payroll period for the year, there are no cumulative earnings prior to the current pay period. This figure is needed to determine whether the employee has exceeded the earnings limit for the FICA and FUTA and SUTA taxes. In later payrolls, this column will accumulate the year to date earnings.The Cumulative Earnings column (Column C) shows the total earnings for the calendar year before the current pay period. Since this is the first payroll period for the year, there are no cumulative earnings prior to the current pay period.
28Completing the Payroll Register AND ENDING January 6, PAID January 8, 2013TAXABLE WAGES DEDUCTIONSNAME SOCIAL MEDICARE FUTA SOCIAL MEDICARESECURITY SECURITYMartinez, AliciaRodriguez, JorgeDunlap, GeorgeWu, CecilBooker, Cynthia2, , ,(A) (J) (K) (L) (M) (N)Alicia Martinez’s social security taxable wages are $400 and her wages subject to medicare are also $400. Her wages subject to FUTA tax is $400. The amount withheld from her paycheck for social security is $24.80 and medicare withheld is $5.80.The Taxable Wages columns shows the earnings subject to taxes for social security (Column J), Medicare (Column K), and FUTA (Column L). Only the earnings at or under the earnings limit are included in these columns.
29Completing the Payroll Register AND ENDING January 6, PAID January 8, 2013DEDUCTIONSNAME SOCIAL MEDICARE INCOME HEALTHSECURITY TAX INSURANCEMartinez, AliciaRodriguez, JorgeDunlap, GeorgeWu, CecilBooker, Cynthia(A) (M) (N) (O) (P)Income tax withheld for Alicia is $ She had no health insurance withheld.The Deductions columns show the withholding for social security tax (Column M), Medicare tax (Column N), federal income tax (Column O), and medical insurance (Column P).
30Completing the Payroll Register AND ENDING January 6, PAID January 8, 2013DEDUCTIONS DISTRIBUTIONNAME INCOME HEALTH NET CHECK OFFICE SHIPPINGTAX INSURANCE AMOUNT NO SALARIES WAGESMartinez, AliciaRodriguez, JorgeDunlap, GeorgeWu, CecilBooker, Cynthia, ,767.50(A) (O) (P) (Q) (R) (S) (T)After all of the deductions, Alicia Martinez’ net pay check is $ After the payroll register is completed, the columns are totaled and the register is proven.Subtract the deductions (Columns M, N, O, and P) from the gross earnings (Column H). Enter the results in the Net Amount column (Column Q). This is the amount paid to each employee.
32Journalize payroll transactions in the general journal Objective 7Recording PayrollRecording payroll information involves two separate entries:Record the payroll expensePay the employeesIt is now time for us to journalize the payroll and the withholdings. We will journalize the payroll transactions in the general journal, although they could be journalized in the cash payments journal instead. We use the totals in the payroll register columns as the basis for our general journal entry to record the payroll.We will make two separate journal entries.
33AND ENDING January 6, 2013 PAID January 8, 2013 DEDUCTIONS DISTRIBUTIONNAME INCOME HEALTH NET CHECK OFFICE SHIPPINGTAX INSURANCE AMOUNT NO SALARIES WAGESMartinez, AliciaRodriguez, JorgeDunlap, GeorgeWu, CecilBooker, Cynthia, ,767.50(A) (O) (P) (Q) (R) (S) (T)The information in the register is used for recording the payroll expenseGENERAL JOURNAL PAGE 1DATE DESCRIPTION POST DEBIT CREDITREF.20--JanOffice Salaries ExpenseShipping Wages Expense ,767.50Social Security Tax PayableMedicare Tax PayableEmployee Income Tax PayableHealth Insurance Premiums PayableSalaries and Wages Payable ,840.56Payroll for week ending Jan. 6
34A separate liability account is set up for each deduction AND ENDING January 6, PAID January 8, 2013DEDUCTIONSNAME SOCIAL MEDICARE INCOME HEALTHSECURITY TAX INSURANCEMartinez, AliciaRodriguez, JorgeDunlap, GeorgeWu, CecilBooker, Cynthia(A) (M) (N) (O) (P)Each type of deduction is credited to a separate liability account.A separate liability account is set up for each deductionGENERAL JOURNAL PAGE 1DATE DESCRIPTION POST DEBIT CREDITREF.20--JanOffice Salaries ExpenseShipping Wages Expense ,767.50Social Security Tax PayableMedicare Tax PayableEmployee Income Tax PayableHealth Insurance Premiums PayableSalaries and Wages Payable ,840.57Payroll for week ending Jan. 6
35Paying EmployeesMost businesses pay their employees by check or by direct deposit.By using these methods, the business avoids the inconvenience and risk involved in dealing with currency.Almost all businesses pay salaries/wages of employees by check or by direct deposit.
36Paying by Check Paychecks may be written on the firm’s regular checking account, ora payroll bank account.Our next journal entry records the actual disbursement of paychecks to the employees.Some businesses set up a separate payroll account to further protect their Cash account. Cash is credited for the net take-home pay.
37Checks Written on a Separate Payroll Account Many businesses write payroll checks from a separate payroll bank account. This is a two-step process.A check is drawn on the regular bank account for the total amount of net pay and deposited in the payroll bank account.Individual payroll checks are issued from the payroll bank account.If a business uses a separate payroll checking account, then the payment process has two steps. A check is drawn on the regular bank account for the total amount of net pay and deposited in the payroll bank account. Individual payroll checks are issued from the payroll bank account.
38Paying by Direct Deposit A popular method of paying employees is the direct deposit method.The bank electronically transfers net pay from the employer’s account to the personal account of the employee.On payday the employee receives a statement showing gross earnings, deductions, and net pay.The bank electronically transfers net pay from the employer’s account to the personal account of the employee. On payday, the employee receives a statement showing earnings, deductions, net pay, and the date of deposit.
39Maintain an earnings record for each employee Objective 8QUESTION:What is an individual earnings record?An individual earnings record (also called a compensation report) is a record that contains information needed to compute earnings and complete tax reports.ANSWER:Employers must maintain individual earnings information in an individual earnings record. An individual earnings record is a record that contains information needed to compute earnings and complete tax reports. This information includes the employee’s name, address, social security number, date of birth, number of withholding allowances claimed, rate of pay, and any other information necessary to compute earnings and complete the required tax reports.
40Totaled monthly earnings The earnings records are totaled monthly and at the end of each calendar quarter. This provides information needed to make tax payments and file tax returns.By the end of the month, Alicia Martinez had earned gross wages of $1,600. The earnings records are totaled monthly and at the end of each calendar quarter. This provides information needed to make tax payments and file tax returns.Totaled monthly earnings